Another bad answer

[retire@40]

If you notice, the person asking the question never stated what his lifestyle was, yet based on income (not spending) the financial guy makes an assumption of what this doctor is going to need in retirement to maintain his current (unknown) lifestyle.  He could be living with his mother and spending $10K a year for what anyone knows.  He just wants to know where to put some additional savings.  He never asked what he will need in retirement.


Retirement-Savings Strategies for High Earners

By Stacey L. Bradford
September 1, 2005
QUESTION: I'm a 37-year-old physician with an annual income of about $500,000. I max out my 401(k) plan, and don't qualify for a Roth IRA. I'd like to make additional contributions to retirement savings, and have looked into using whole life insurance as an option for tax-deferred savings. Is that a wise idea, or should I look to more conventional investments options such as stocks, mutual funds or real estate? When is whole life a good investment, and how much should be invested in it?

ANSWER:
Maxing out a 401(k) is a great first step toward securing a comfortable retirement. For many people, however, it's not enough. Someone making $500,000 a year would need a nest egg worth $8 million to $10 million in today's dollars to maintain his or her lifestyle in retirement, says Harold Evensky, a certified financial planner based in Coral Gables, Fla.

http://yahoo.smartmoney.com/ask/index.cfm?story=20050901&afl=myyahoo

 

[Martha]

I still see the assumption over and over again that you will need 75% of your income or more in retirement. I guess it simply is easier than dealing with expected expenses.

 

[LOL!]

The answer to the question was not bad: max out 401(k), then invest in tax-managed mutual funds and ETFs before considering variable annuities which should be avoided. Avoid whole life. The answer works no matter what percent of your current income you will spend in retirement.

I guess we could rag over your mis-representation of the article as much as you rag over Evensky's statement.

 

[retire@40]

The answer to the question was not bad:  max out 401(k), then invest in tax-managed mutual funds and ETFs before considering variable annuities which should be avoided.  Avoid whole life.  The answer works no matter what percent of your current income you will spend in retirement.

I guess we could rag over your mis-representation of the article as much as you rag over Evensky's statement.

I think it's hard to mis-represent the article when I posted his exact words. Assuming someone's lifestyle based on earnings is a bad assumption. Lifestyle is based on spending, not earnings.

 

[Jarhead*]

I still see the assumption over and over again that you will need 75% of your income or more in retirement.  I guess it simply is easier than dealing with expected expenses.

Martha:  If my memory is hitting on all cylinders, I
believe in a prior post you mentioned that it was your "after tax" expenses that is the criteria you should use to evaluate your ability to retire.  (As far as I'm concerned, that is the only valid formula).
The premise that you should apply a "percentage of prior earnings" to determine the ability to retire is wrong on so many fronts, I hardly know where to begin.
I realize that advice on this matter should be "generic", and not about me personally, I don't know anybody else well enough to use as an example.
When I was working, I had 2 children, a stay-at-home spouse, and was contributing about 20% of my widowed mothers expenses, who was trying her best to get by on Soc. Sec. as her only income.
In other words, I needed a good sized income to stay on top of my situation.
Skip forward to 19 years ago, when I retired, the heavy lifting for the kids was pretty much over, and had enlisted the help of brothers and sisters to help with my mom.
With just the two of us, while I find any use of a percentage of prior earnings, to be of no value at all, it as best as I can figure, 30% or so.
(Again, it's your lifestyle, and actual spendable, that is the only things worth considering).
Another post I read a while back might be also worth considering.  Spending habits, and lifestyles do change over the years.  Although I still play a lot of golf, and fly-fish, we don't travel much anymore, and eat out as much as we used to, so applying a requirement that your spendable income adjust to actual inflation (at least in our case would be over-kill).

Figure out what your requirements are in the spending area, and disregard the nonsense of "percentage of prior earnings".

That's the gospel, according to Jarhead.

By the way, Martha, you've been an attorney for a long time, and I have to have a dictionary handy to follow any of Greg's posts, so you two, I'm sure have this figured out.

Jarhead

 

[Nords]

... "after tax" expenses [are] the criteria you should use to evaluate your ability to retire.  (As far as I'm concerned, that is the only valid formula).

We never seriously considered ER until we hit a career bump and it became possible that my spouse's military pension would be delayed a few years. The process of examining expenses made us realize that our ER could depend on spending down savings for 20 years followed by adding her pension & our SS back to the cash flow. Spending more money now in anticipation of getting some of it back later is counter-intuitive and the epiphany hit us upside the head like a 2x4.

Last week some Navy friends dropped in. We've worked & socialized together for nearly 20 years and our shared liberty experiences will keep all of us from running for political office. He'll pin on O-6 in a few months and she's been in the Reserves for nearly 20 years. They have two kids (aged 11 & 8) so they've been concerned about college savings but haven't thought about retirement. His new job is one of those 100-hour/week staff obsessions jobs deep in the bowels of the Pentagon where he'll either break out or break down. He just finished a command tour and they've spent four years in Japan so the lifestyle contrast is pretty stark and he's beginning to perceive that his career options are narrowing down.

Of course a few frosty beverages on our back lanai did nothing to improve his morale. We asked them how much they'd need to live on and he said "$100K/year." Once the laughter died down he said that it wasn't based on any real numbers-- just a comfort factor based on inflation, healthcare expenses, and what currently leaks out of his wallet. We crunched the numbers on his/spouse's projected retirement income and came up with over $90K/year in their 60s. Then they ran through their spending and came up with less than $75K/year (including college savings and a fairly hedonistic lifestyle) and realized that their actual expenses would probably be lower. They'd never looked at that before-- only at monthly savings and not so much at expenses-- so a small lightbulb has been turned on.

We gave them our copy of Kaderli's CD and I'm sure the corruption will be complete by the end of the year...

 

[Jarhead*]

We gave them our copy of Kaderli's CD and I'm sure the corruption will be complete by the end of the year...

Nords: You should be ashamed of yourself.
Your friend, recently to be promoted to 0-6 (getting close to the dreaded ego zone), and on assignment to be "swimming with the sharks", in the Pentagon, and will need the killer instinct to survive, you might have taken a little edge off.

The bloods on your hands Nords.

However, if his assignment goes to "hell in a handbasket", I'm sure he will come to the conclusion that you have presented him with a pretty darn good alternative.

Jarhead

 

[Nords]

Nords:  You should be ashamed of yourself.

Your friend, recently to be promoted to 0-6 (getting close to the dreaded ego zone), and on assignment to be "swimming with the sharks", in the Pentagon, and will need the killer instinct to survive, you might have taken a little edge off.

The bloods on your hands Nords.

However, if his assignment goes to "hell in a handbasket", I'm sure he will come to the conclusion that you have presented him with a pretty darn good alternative.

All I said was "C'mon in, the water's fine!"

He already knows how to surf, he just needs a different school of sharks in a different body of water.

I looked at some of my fellow naval officers and said "Hmmm, future flag officer. I need to retire RIGHT NOW." I look at this guy and say "Hey, the promotion system is working." The best part about it is that he and his spouse are a team where she has the creative ideas and he does the work. They could easily be at this through his second or third star.

He's had three command tours and a RAND fellowship so I don't think it'll go to his head-- too quickly. His spouse was also mobilized after 9/11 for a year so he's keenly aware of balancing career & family. But he's joining one of those very small teams working directly for the top guy to cut the bureaucracy and implement some of the Navy's most urgent programs. I think he'll decide pretty quickly that he & spouse are better on their own instead of chasing stars. And we know that we can always count on her to say "Enough." They'll have their answer by the end of the second year.

But their eight-year-old son is already excited about growing up near the Naval Academy...

 

[Eagle43]

NORDS, you are a devil, missing with that careerist's mind. Now, everytime the old man chews his rear (about once a day), he's gonna see that lanai. Hopefully, he will see the light. If not, well, you tried.